Monthly Archives: November 2017

Post navigation

Corporate surveys in November show that the pace of growth is still accelerating in the Euro Area. This can be seen at the global level but also in every sector, notably in the manufacturing sector where the stronger momentum is consistent with a higher international trade dynamics. Surveys also show that employment is increasing rapidly and that nominal pressures remain limited.Continue reading →

After the failure to form a coalition the first thing to notice is that Merkel is no longer at the center of the game. She has been replaced by the German president, Frank-Walter Steinmeier, who will decide what will be the next steps.

These steps can be threefold
1 – A coalition between the CDU-CSU and the social democrats of the SPD but the SPD is reluctant to participate.
2 – A minority government but with the risk of doing nothing while important issues have to be managed (the current negotiation failed on the refugees’ question, on carbon emissions, on taxes and on education) These are important issues that cannot be postponed.
3 – New elections at the beginning of next year

I favor the third possibility but my guess is that in this type of situation domestic questions are at the center of the discussion or of the campaign.
European questions were not at the center in recents days but with Merkel’s recent point of view was a kind of guarantee that Europe would not be forgotten.
It could be the case in a foreseeable future if Merkel is no longer the leader. Europe could then be erased from discussions

The recent improvement in the perception of Europe is twofold.
1- GDP growth is stronger and employment is improving rapidly
2- The commitment between Merkel and Macron to improve the way institutions are working at the European level

If Merkel is weaker and focused on internal issues then European reforms will no longer be on the agenda
This would create an uncertainty that could reduce the economic horizon then limiting investment and the possibility to improve the potential growth. Therefore it can have a negative impact on growth and could be damaging.

Another point on reforms is that with stronger growth it limits the risk of populism. If, because Merkel is no longer at the center of the picture, reforms are not done then we will see the convergence to a lower growth trend rate and more that the come back of populism with the risk of weaker institutions. Some nationalists want to exit from the EU.
The political process in Germany is at risk not only for the Germans but also for Europeans as the current momentum would become more fragile opening the door to populism

The impact on Brexit negotiators will depend on the result of the current political process. A bias positive to populism would a piece of cake for the UK government as populists do not like Europe. It would be the worst situation for a European citizen.

This week, the Chinese bond market has again been under selling pressure. The yield on 10-year Chinese government bonds once again flirted with the 4%, the highest in 3 years.
The Pboc (the Chinese Central Bank) intervened twice this week by injecting liquidity into the market, for a total amount of 810 billion yuan or USD 122bn , the largest injection since mid-January.Should we worry?No. The movement began just after the end of the C.C.P congress (end of October) when the Chinese authorities signaled clearly that they would continue their fight against high leveraged finance, ie shadow banking.
This has resulted in massive sales from Chinese government bondholders notably from mutual funds that are the second largest holders of Chinese state bonds. They feared a tightening of financial conditions.China’s interest rates have been low so far because of the loose Pboc’s monetary policy. The orientation has not changed but the action of the Chinese monetary policy is now more focused.
The Pboc intervened in the market by injecting liquidity in order to reduce volatility and it will continue to intervene if necessary to correct the excesses of the financial markets.
The Chinese central bank must find an equilibrium between its deleveraging campaign and the stabilization of Chinese financial markets so as not to penalize economic activity.

Does this question the attractiveness of the Chinese bond market for international investors? and the willingness of the Chinese authorities to open their bond market?
At 4%, Chinese government bonds remain attractive compared to their counterparts in developed countries, helped by a stabilized yuan. China’s deleveraging campaign is rather a positive signal sent to international investors. China will not come back on the opening of its bond market to international investors because of the internationalization of the yuan. China’s economic activity remains sound. This is only a moment of turbulence to pass …

Growth in France is set to come to 1.8% in 2017 and 1.7% in 2018. From today’s standpoint, these figures look high as trend growth for the French economy came to slightly more than 1.1% on a yearly basis between 2013 and the third quarter of 2017, making 2017 and 2018 look like good vintages.However, a comparison with the pre-crisis period is harsh. Trend growth for the French economy stood at 1.8% over the period between 2000 and 2008 and could go well beyond this figure, which equates to the cycle peak in today’s economy.
The extent of the economic cycle provided leeway for all concerned as growth could go well beyond this trend, e.g. coming out at 4% in 2000. French economic policy at the time did not generally view this cycle peak as an opportunity to adopt a more restrictive strategy, and France as a whole was unable to reduce imbalances when growth was strong, particularly from a budgetary standpoint. The French budget “funding pot” concept, invented during periods of vigorous growth, was used to justify all sorts of spending on the back of higher budget revenues. Continue reading →

The Bank of England has increased its main rate by 25 basis points to 0.5%.

Two reasons to explain this movement

1 – The British economy has changed and its productivity trend is much lower now than before the crisis. This means that the risk of overheating is associated with a lower growth rate than before the crisis. Therefore the BoE has to move more rapidly than in the past, the equilibrium BoE interest rate is lower.
Nevertheless, if Brexit is a source of weakness according to the BoE it is not a source of rupture (this can be discussed). The economic scenario of the BoE is quite optimistic as it suggests that productivity growth could improve converging to the momentum seen in other developed countries. Continue reading →